Petrie v Dickson (No 2)

1. [1]

   On 9 August, I delivered my substantive judgment in this matter: Petrie v Dickson [2024] NSWSC 972 (“J1”). On 29 August, I made orders in a form agreed by the parties to reflect the conclusions I had reached. The issue of costs remains in dispute and is the subject of this judgment. The following reasons assume familiarity with J1, and the abbreviations used therein.

2. [2]

   The dispute which was the subject of the proceedings concerned the enforcement of an easement, or purported easement. The parties to the proceedings are the registered proprietors of adjoining lots in a duplex development in Palm Beach on Sydney’s Northern Beaches. Lot 1, the dominant tenement, is owned by the defendants. Lot 2, the servient tenement, is owned by the plaintiff.

3. [3]

   The disputed easement was created by the parties’ predecessors in title in 2003 by registration of an instrument made under s 88B of the Conveyancing Act 1919. Relevantly, the instrument purported to grant to the owner of Lot 1 an easement “for garden use” over a 60m2 portion of Lot 2, together with the right to construct, maintain and use a “garden shed” in that area: J1 [44].

4. [4]

   The dispute began when the plaintiff complained that the defendants were using the servient area for wider purposes than were permitted under the grant. As I have explained in J1, at [10]-[16], the plaintiff’s principal contention was that, as a matter of interpretation, the grant only allowed the owner of Lot 2 “shared” or “common” usage of the servient area. In the alternative, if “the easement [did] grant the defendants sole and exclusive use of the burdened land or the shed”, the plaintiff claimed that it was invalid under the “ouster principle”: J1 [243]-[245], [268]-[269]. The defendants contended that the terms of the easement gave them a level of practical control over the servient area which was inconsistent with the plaintiff exercising any comparable rights over the land, but which did not strictly amount to exclusive possession.

5. [5]

   The hearing began on 18 March and lasted for two days, following which there were supplementary written submissions. As I described at J1 [53]-[56], both parties’ positions shifted in the course of argument. The defendants migrated towards the plaintiff’s shared/common usage interpretation of the grant and, for the plaintiff, the invalidity claim (which was premised on the Court accepting the defendants’ original contention that they effectively had “full control” of the servient area) loomed larger and larger.

6. [6]

   In the end, I rejected the plaintiff’s shared/common usage interpretation, concluding that the grant gave the defendants effective control over the servient area, including the shed: J1 [107]-[109]. But taking that conclusion into account, I then accepted the plaintiff’s alternative claim that the easement was invalid under the “ouster principle”: J1 [269]-[315]. The consent orders made by the Court on 29 August provided for a declaration that the easement was invalid, and an order that the defendants do all things necessary to remove it from the Register, and remove their goods and chattels from the shed.

Costs

1. [7]

   On 15 November 2023, the solicitors for the plaintiff made an offer of compromise which proposed that the parties consent to the Court making a declaration in the following form:

2. [8]

   The offer also included:

3. [9]

   On 21 November, the solicitors for the defendants responded by way of letter which outlined some perceived issues with the operation of the proposed declaration and, accordingly, sought clarification. The letter relevantly stated:

4. [10]

   The solicitors for the plaintiff replied in an email the next day. The relevant parts of the email have been reproduced below:

5. [11]

   The solicitors for the defendants rejected the offer in a letter dated 14 December for the following reasons:

6. [12]

   Counsel for the defendants accept that the defendants should be ordered to pay the plaintiff’s costs of the proceedings on an ordinary basis, as agreed or assessed: see Uniform Civil Procedure Rules 2005, r 42.1. The issue for determination in this judgment is whether indemnity costs should be awarded to the plaintiff from 15 November 2023 (the date of the offer of compromise).

7. [13]

   The offer was expressed to be made under the Rules. The relevant requirements for making an offer of compromise are set out in r 20.26:

8. [14]

   In the present proceedings, the offer of compromise was expressed to be “in respect of the whole of the [plaintiff’s] claim”.

9. [15]

   The procedure for accepting an offer is provided in r 20.27:

10. [16]

    The cost implications if a defendant refuses to accept a plaintiff’s offer of compromise are set out in r 42.14:

11. [17]

    An offer which has been validly made pursuant to the Rules gives rise to a presumption that indemnity costs will be awarded: see Karpin v Gough (No 2) [2022] NSWSC 682 at [41]. Where this is the case, the onus lies on the offeree (who has rejected the offer) to displace the presumption: Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) [2014] NSWCA 391 at [28]-[29].

12. [18]

    The costs regime in the Rules reflects the public policy of encouraging the prompt and economical disposal of litigation. The prima-facie costs presumption that flows from the Rules has been said to arise as a recognition that, from the time of non-acceptance of the offer by the offeree, “notionally the real cause and occasion of the litigation is the attitude adopted by [the offeree who] has rejected the compromise”: see Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724.

13. [19]

    Built into the drafting of r 42.14 is a discretion for the Court to depart from the ordinary course – the presumptive entitlement to indemnity costs – and “order otherwise”. It is clear on the authorities that this discretion must be exercised in a way which does not undermine the policy of the Rules: Walker v Harwood [2017] NSWSC 228 at [10]-[31].

14. [20]

    The principles relevant to the exercise of the Court’s discretion to “order otherwise” are discussed by Kunc J in Bates v Cooke (No 2) [2014] NSWSC 1322, at [33]:

15. [21]

    In my view, in the present proceedings, three ‘rational bases’ exist which justify the Court’s exercise of its discretion to displace the defendant’s entitlement to indemnity costs:

    1. (1)

       the Court would not have made the proposed declaration by consent or on a summary basis;

    2. (2)

       there were critical issues with the form of the proposed declaration which, if made, would not have resolved the dispute; and

    3. (3)

       the proposed declaration was, in any event, contrary to the interpretation of the easement ultimately adopted by the Court.

16. [22]

    The Court would not have made the proposed declaration by consent or on a summary basis: The Rules contemplate that a compromise may be enforced by the Court entering a judgment by consent or on a summary basis, pursuant to an application under r 20.27(3) (above [15]). Counsel for the defendants contended, however, that that procedure could not have been used for the plaintiff’s offer, had it been accepted. This was because the declaration which was the subject of the offer concerned a right in rem (a registered easement). Authorities were advanced to support the proposition that the Court will not make declarations by consent in cases involving public rights, rights in rem or other analogous rights, unless satisfied about the merits of such course based on the facts and the law, after proper argument: see Termijtelen v Van Arkel [1974] 1 NSWLR 525 at 529-530; ASIC v Rich [2004] NSWSC 836 at [10]; Freeman v Allianz Australia Insurance [2005] NSWSC 257 at [26]-[28].

17. [23]

    As I understood them, counsel for the plaintiff did not dispute the proposition that a declaration of the type proposed would not have been made merely by consent. Counsel accepted that it would have been necessary for the Court to satisfy itself that the proposed declaration was justified on the evidence and on the law. But counsel submitted that the Court would not have had to deal with a lengthy adversarial hearing involving cross-examination and extensive submissions. Counsel provided examples from case law where declaratory orders were made by the Court by consent (including concerning “public rights”) after conducting an “abbreviated hearing”.

18. [24]

    I think that counsel’s acceptance that a further hearing would have been necessary prior to the making of the proposed declaration is revealing. It shows that acceptance of the offer would not have disposed of the case immediately. Further time would have been taken up, and the parties would have been exposed to further costs, even if the further hearing was only an “abbreviated” one. And if the Court had declined to make the agreed declaration, the settlement would have failed, and the case would have had to be disposed of in the ordinary way in due course.

19. [25]

    From the point of view of a party to litigation, avoiding further costs is usually a major incentive in accepting an offer of compromise. In my view, there is a risk of unfairness in costs sanctions being used to pressure a party to accept an “offer” if acceptance of that “offer” will not necessarily end the litigation and thus may leave that party exposed to further delay and further unrecoverable costs.

20. [26]

    One way to avoid such a risk of unfairness would be to treat the term “offer” in the Rules as implicitly having its contractual meaning, so that such an offer is only valid if, upon acceptance, it gives rise to an immediate and binding settlement. This was the view expressed by Gillard J, in the context of the comparable Victorian costs regime, in MT Associates Pty Ltd v Aqua-Max Pty Ltd (No 3) [2000] VSC 163, at [56]. I made the same assumption in Shazbot (No 6) at [117]. On the other hand, Wilson J in Dibbs v Emirates (No 2) [2015] NSWSC 1786 was not prepared, in a case where the precise wording of the order to be made in consequence of acceptance could readily have been worked out between the parties, to say that imprecision invalidated the offer: see at [18].

21. [27]

    In passing, I note that in Global Consulting Services Pty Ltd v Gresham Property Investments Ltd (No 3) [2019] NSWCA 208, Leeming JA (sitting as a single judge) made an indemnity costs order on the basis of a Calderbank offer which provided for the proposed settlement to be recorded in a formal deed. And in Harris v Harris [2013] NSWSC 1157, Kunc J awarded indemnity costs where a Calderbank offer provided for the proposed settlement to be approved by the Court. But the questions of construction which arise for formal offers under the Rules did not arise in these cases. The ultimate question for a Calderbank offer is whether refusal was unreasonable, and the non-final nature of an “offer” may always be taken into account for that purpose.

22. [28]

    In Ritchie v Advanced Plumbing and Drains Pty Ltd (No 2) [2022] NSWSC 849, Davies J had to deal with an application for indemnity costs under r 42.15A (the equivalent provision in the Rules for when an offer is made by a defendant and not plaintiff) in unsuccessful class action litigation. His Honour stated, at [65]:

23. [29]

    His Honour did not consider whether the offer was valid under the Rules, but considered that its non-final nature was a “rational basis” for ordering otherwise under the Rules. In my view, the same reasoning applies in the present case.

24. [30]

    There were critical issues with the form of the proposed declaration which, if made, would not have resolved the dispute: Even if the defendants had accepted the offer, and the parties had jointly asked the Court to make a declaration in the form proposed, the Court would not have done so. This is for two reasons.

25. [31]

    First, as a general rule, a court operating in the Torrens system should not make a declaration as to the interpretation of a dealing which forms part of the Register. This was a point made by the solicitors for the defendants in their response to the offer of compromise (above [9]). Under the Torrens system, the Register is both conclusive and exhaustive, so that, apart from some narrowly defined exceptions, interested parties need not undertake any additional searches or investigations in order to understand the nature and extent of any rights or interests which may exist over the land: see Westfield Management Ltd v Perpetual Trustee Co (2007) 233 CLR 528 at [39]. The declaration offered, if made, would have been known to the parties but would not necessarily become known to third parties and could not be discerned from an inspection of the Register. It would be a trap for future owners who might form a view on the interpretation, or validity, of the grant in its registered form and then find themselves bound by a contrary declaration of the Court operating in rem indefinitely into the future.

26. [32]

    Second, the proposed declaration was expressed in negative form. By making a declaration that the defendants “do not” have exclusive possession of the servient tenement or the gardening shed, the Court would be failing to define, with any particularity, the extent of the rights actually conferred by the grant. This uncertainty was raised by the solicitors for the defendants in their correspondence (above [9], [11]). It would, in my view, necessarily have required further argument to resolve, if resolution was possible at all.

27. [33]

    For these reasons, the offer of a consent declaration was not an appropriate way of resolving the interpretation issue. What the plaintiff should have done was to make an offer requiring the registration of a supplementary instrument clarifying (on the view I ultimately formed, amending) the terms of the grant. Acceptance of that offer would have resulted in orders which the Court would have been able to make by consent (because the parties are always free to vary the terms of an easement), and which would not have infringed the completeness of the Register.

28. [34]

    The proposed declaration was contrary to the interpretation of the grant ultimately adopted by the Court: The proposed declaration was premised on the plaintiff’s shared/common usage interpretation, which, as already noted, I rejected at trial. On my conclusions, it was not a true construction of the grant. For this reason alone, even if the offer had been accepted, the offered declaration would not have been made by the Court.

29. [35]

    The significance of this point for present purposes may be put in several ways. In the first place, I think it is questionable whether acceptance of the offer would, for the purposes of r 42.14, have led to a more favourable outcome than what was in fact achieved. Ultimately, the plaintiff’s contention on the interpretation of the grant failed.

30. [36]

    It is true that the result of the case is that the plaintiff has got rid of the easement entirely. In that sense, it might be said that the plaintiff bettered her offer. But that may not always be so, and it may depend upon the plaintiff’s particular circumstances. The easement conferred advantages on the owner of Lot 2, but it also required the expenditure of money on the maintenance of the servient land, including the shed. The plaintiff no doubt made the judgment that she would be better off getting rid of the easement and incurring that expenditure herself. That might well be so in many, or even most, cases. But not necessarily in every case, and it may to some extent be a subjective matter.

31. [37]

    What this shows is that to say that the plaintiff bettered her offer by getting rid of the easement involves more than making a comparison between the terms of the offer and the terms of the order ultimately made which is purely mathematical, or otherwise admits of only one correct answer. It may involve looking at considerations which are personal to the plaintiff. Arguably, a comparison which involves subjective elements of that type is not one which is contemplated by the Rules.

32. [38]

    Furthermore, it can hardly be said that the “notional real cause” of the present litigation was the attitude adopted by the defendants. The very fact that, in the course of the argument, the defendants effectively took up the plaintiff’s initial interpretation, shows that this was not so. If anything, the “real cause” of the litigation going to judgment was that the parties could not agree on the validity claim. The plaintiff has succeeded on that claim, but that success has nothing to do with the offer.

33. [39]

    Ultimately, the public interest associated with the prompt disposal of proceedings must be balanced against the dictates of justice. In my view, it would be wrong to award the plaintiff indemnity costs on the basis of a contention which was ultimately found by the Court to be invalid as a matter of law. Likewise, the defendants should not be exposed to a liability for indemnity costs for refusing an offer on the basis of reasoning (set out in their solicitor’s correspondence) which has been vindicated by the Court’s decision. The Rules should not operate in such a way as to punish a party for failing to submit to the determination of that party’s rights on an invalid basis, no matter how prompt or economically efficient such a determination might be.

34. [40]

    Conclusion: It is unnecessary to decide the questions I have raised concerning the construction of the Rules. For the reasons which I have given, I think that there is ample justification for the Court to exercise its discretion to ‘order otherwise’. The plaintiff’s claim under the Rules for indemnity costs from 21 November 2023 fails for this reason.

35. [41]

    In the final paragraph of their submissions in reply, counsel for the plaintiff contended that, in the case that the presumption under the Rules is displaced, the Court should use its discretion pursuant to s 98(1)(c) of the Civil Procedure Act 2005 to make an order for indemnity costs in the plaintiff’s favour. As is common in circumstances where an offer of compromise fails under the Rules, the plaintiff was effectively asking for the Court to use its general cost discretion to award indemnity costs on the basis that the offer be treated as a Calderbank offer: Calderbank v Calderbank [1975] 3 ALL ER 333; Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 at [27].

36. [42]

    The relevant principles are well established. There is no presumptive entitlement to indemnity costs which flows from the making of a Calderbank offer. Instead, offerors bear the burden of persuading the court to exercise its general costs discretion in their favour: Commonwealth v Gretten [2008] NSWCA 117 at [46]. This requires the offeror to demonstrate that the offeree acted unreasonably, in the circumstances in which the offer was made, in rejecting it: Karpin at [41].

37. [43]

    For the reasons which I have given, I do not think that unreasonableness on the part of the defendants has been established. Consequently, the claim for indemnity costs pursuant to the Courts’ general costs discretion also fails.

Orders

1. [44]

   The orders of the Court are:

   1. (1)

      Plaintiff to pay defendants’ costs of the application for indemnity costs.

   2. (2)

      Defendants otherwise to pay plaintiff’s costs of the proceedings on the ordinary basis.